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The telecom industry is one of fastest growing sectors in India and has greatly contributed in bridging the urban-rural gap. The once monopolistic market is today, highly competitive. The increasing competition between the existing and new players, has already initiated a tariff war, which would have a great impact on the industry in the days to come. The competitive environment is expected to get fierce after introduction of the much awaited Mobile Number Portability.
With the budget countdown ringing the bell, industry players are looking forward to a conducive tax policy to maintain their profitability in this competitive market. Some of the significant expectations include:
Reduction of rate of TDS on margins of market intermediaries of pre-paid vouchers
While selling pre-paid products, most telecom operators enter into 'principal-to-principal' arrangements with the intermediaries. However, the tax authorities often treat the intermediaries as agents of the telecom operator thereby alleging that the difference between the Maximum Retail Price (MRP) and the price at which it is made available to the intermediary is in the nature of commission and accordingly, tax @ 10% should be withheld on the margin allowed to the distributor. This has resulted in unnecessary litigation and is causing financial hardship to telecom operators. Accordingly, to avoid litigation, tax withholding may be imposed 1% as opposed to 10% demanded currently.
Clarification on tax treatment of upfront 3G spectrum fees paid
Recently, the telecom industry has made substantial payments to acquire the right to use 3G spectrum for provision of telecommunication services. As regards deductibility of the amount paid for the 'right to use 3G spectrum', there is lack of clarity whether the same should qualify as 'intangible asset' (and eligible for depreciation at the rate 25 percent on written down value under Section 32 of the IT Act) or as 'expenditure for obtaining telecommunication license' (and eligible for amortization in accordance with Section 35ABB of the Act). A specific amendment/clarification is needed should that the spectrum usage right qualifies as an “intangible asset” depreciable under section 32 of the Act in line with the tax treated provided in the proposed Direct Tax Code.
Amendment in Section 43A of IT Act
Currently, The foreign exchange fluctuations on borrowings in foreign currency to purchase capital assets are adjusted against the cost of the capital asset only if the capital asset has been acquired from a foreign country. In case the capital asset is purchased from India, the exchange fluctuation on the foreign borrowings in a dead gain / loss with no tax treatment.
In order to enable telecom operators to raise funds for payment of upfront fees towards 3G Spectrum, External Commercial Borrowings (ECB) guidelines were amended to allow them to raise upto USD 500 mn from abroad. Under the current provisions of Section 43A of IT Act exchange fluctuation loss / gain on ECB for acquisition of 3G spectrum cannot be adjusted against the cost of the 3G spectrum. Thus, government should bring out specific amendment in Section 43A with respect to deductibility / taxability of foreign exchange fluctuations on ECB's arising on account of increase/reduction in liability incurred for payment of 3G spectrum fee.
Applicability of service tax on services provided to customers in Jammu & Kashmir (J&K)
Applicability of service tax on services provided to customers in J&K is still ambiguous. There could be three possible scenarios: i) Service is provided from J&K and consumed in J&K, where service tax is clearly not applicable; ii) Service is provided from J&K and consumed outside J&K, where service tax would be applicable, however, there is no administrative mechanism to collect tax in J&K and iii) Lastly, levy of service tax on services provided from outside J&K, but consumed within J&K, where there is no clarity with respect to applicability of service tax. The Government should issue an appropriate circular to clarify the intent of the law to keep all the services provided to customers in the state of J&K out of the purview of service tax. The circular should clearly give examples of all possible scenarios with service tax applicability on each scenario and remove the ambiguity.
Cenvat credit on telecom towers, shelters and other goods at tower site
The excise duties paid on telecom towers, pre-fabricated shelters and other goods, which are installed at a tower site are availed as cenvat credit and used to discharge the service tax liability of the telecom operators. Recently, the authorities have taken a discriminatory stand for disallowing such credit. These goods are essential for creating the passive infrastructure, which is used for providing telecom services and constitute a major portion of the total investment made by a telecom service provider. Denial of credit on these goods by the authorities not only leads to litigation and blockage of funds for the telecom players but defies the basic principles of the Credit Rules. Accordingly, appropriate amendment should be made in the Cenvat Credit Rules to clearly allow credit of the said goods to telecom operators.
Transfer of Cenvat Credit on account of transfer of ownership
It was an accepted position of law that in case of transfer of ownership of business without physical removal of assets, the cenvat credit availed by the transferor company was not required to be reversed. However, the Karnataka High Court's in the case of Associated Cements' (appeal against which is pending before the Supreme Court) have taken a contrary stand. This stand of the High Court has now created an ambiguity in the legal position. Accordingly, appropriate clarification/ amendment should be issued to clarify the scope of 'removal' and that there should not be any requirement to reverse credit in case of transfer of ownership.
Special Additional Duty on import of telecommunication equipments
Currently, telecom service provider is not entitled to avail credit of special additional duty (SAD), in lieu of value added tax (VAT), which is a part of customs duty levied on import of network equipment. Eventually the, non creditable SAD paid by the telecom operator is an added cost on the telecom operators. Accordingly, an amendment should be brought to either exempt SAD for telecom operators or make the same creditable. The said amendment would reduce the capital cost and help in faster rollout of telecom network especially in the rural sector.
Levy of SAD on trading of goods by SEZ units
Presently, exemption from levy of SAD on clearance of goods from Special Economic Zones (SEZ) to Domestic area (DTA) is available only to goods manufactured in a SEZ. For traders, such an exemption is presently not available. In view of the same, clearance of telecom goods as such from SEZ to DTA is subject to SAD (which is in lieu of VAT) and VAT/ CST, which leads to dual levy of VAT and SAD on the same transaction. Given the intent of legislature, it is clear that SAD and VAT/ CST should not be levied together on the same transaction. Accordingly, outright exemption from the levy of SAD should be introduced to avoid dual levy of VAT/ CST and SAD for trading of goods from SEZ to DTA
Introduction of General Rules of Origin (ROO):
ROO serve several purposes. They help to determine the country of origin of the goods which is now a mandatory requirement to be mentioned on a bill of entry for import of goods. ROO also help determine whether a particular good will enjoy a lower rate of duty under Trade agreements, or would the same be subject to anti-dumping duty. Due to absence of general ROO to determine the originating country, there is no clarity on determination of originating country for claiming the benefits under trade agreements or for imposition of antidumping duties. The same assumes even more importance in view of certain recent anti dumping duty levied on equipments including SDH equipments, used for telecommunication network. Therefore, it is essential that transparent and general ROO are in place.
License fees and other levies
Though this has been an on Industry wish list for many years, the telecom industry is subject to numerous taxes and levies which takes away the affordability. As in most of the developed countries, a single levy closer to the rates of approximately 0.5-2% would give a much awaited boost to the telecom sector and shall help in provide cheaper services across the country.
The importance of the telecommunication industry in our economy requires no deliberation. Harsh tax policies not only threaten the profitability of the industry, but are also a deterrent to the development of the solitary parts of the country. The Government should endeavour to make best use of the tax policies to stimulate growth in this sector.
Vishal Malhotra, Tax Partner, Ernst & Young